* APRIL 19, 2011
U.S. Warned on Debt Load
S&P Signals Top Credit Rating Is in Danger, Stoking Political Battle on Deficit
By DAMIAN PALETTA And E. S. BROWNING
S&P Cuts U.S. Ratings Outlook to Negative - WSJ.com
Stocks tumbled Monday after Standard & Poor's cut its credit outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating. Paul Vigna, George Stahl, Kathleen Magigan and Jim McTague discuss.
A blunt warning Monday from a credit rating firm about the U.S. government's mounting debt pushed stock markets lower and intensified political divisions in Washington about how best to tackle growing deficits.
MarketBeat Recap
S&P analysts hosted a call explaining their decision to keep the U.S. at a AAA rating, but move the outlook to "negative." MarketBeat live-blogged the call. Here is the recap.
Both the Obama administration and House Republicans scrambled to gain leverage from Standard & Poor's changing its outlook on U.S. Treasury securities to "negative" from "stable."
S&P didn't lower its top-notch AAA-bond rating for U.S. government Treasury securities, and their prices initially fell but later rebounded amid optimism that the report could serve as a catalyst to force both sides in Washington to compromise.
The Dow Jones Industrial Average fell 140.24 points, or 1.14%, to 12201.59, its biggest decline in a month, after earlier tumbling almost 250 points. Stocks in Britain, Germany and France fell more than 2%, with most of the declines coming after the S&P news. Gold surged to just below $1,500 an ounce.
But hopes that the report might spur a deficit deal actually helped U.S. borrowing costs and the dollar. The 10-year Treasury bond rose 9/32 in price, pushing its yield down to 3.373%, its lowest 3:00 p.m. level since March 23. The dollar rose against the euro.
A downgrade would push up interest rates on Treasurys, which are a benchmark for other consumer and business borrowing rates, raising the cost of credit throughout the economy.
The S&P report questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits. "The sign of political gridlock was a key determinant in our outlook change," said John Chambers, chairman of the sovereign ratings committee at Standard & Poor's Ratings Services.
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This year's budget deficit is projected to rise to between $1.5 trillion and $1.65 trillion, equal to roughly 10% of America's gross domestic product, or total economic output. The White House is hoping to form a group of Democratic and Republican lawmakers to craft a framework for reducing the deficit, but has made little progress. Vice President Joe Biden plans to host the group's first meeting May 5.
Treasury Secretary Timothy Geithner has warned lawmakers that their reluctance to raise the federal borrowing limit could cripple the recovery, and the jittery reaction to the S&P report could underscore his arguments about how badly markets would react to any failure to raise the debt ceiling.
The U.S. debt now stands at $14.219 trillion—just shy of the $14.294 trillion cap—and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest on existing debt.
If no action is taken, the government could default on its debt by July 8. Wall Street executives have called Capitol Hill with increasing frequency in recent weeks, urging it to raise the debt ceiling immediately.
Although S&P said it changed its outlook even while assuming the debt ceiling will be increased, many Republicans cited the report in affirming their position that they would raise it only in exchange for a commitment to address the deficit.
"As S&P made clear, getting spending and our deficit under control can no longer be put off for another day, which is why House Republicans will only move forward on the President's request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington," said House Majority Leader Eric Cantor (R., Va.).
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White House and Treasury Department officials, who were alerted to the report on Friday, questioned its conclusions but said it validated their efforts to broker a bipartisan deal to address the debt. Administration officials had sensed the downgrade was coming for weeks, and informed President Barack Obama about the change over the weekend.
"Any call for a bipartisan agreement on deficit reduction, on fiscal reform, is a welcome one, and in that context, I think that it adds to what we believe is some momentum towards that end," said White House spokesman Jay Carney.
The move to a negative outlook means S&P believes there is a one-in-three chance that Treasury bonds could be downgraded from their AAA rating, the ratings agency said. Mr. Chambers said outlooks cover a period of six months to two years, during which the credit-rating agency monitors whether the government is moving toward resolving the situation.
Moody's, another U.S. ratings firm, came to a different conclusion in its Weekly Credit Outlook. It noted "the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government."
Since S&P began assigning outlooks to government debt in 1989, five AAA-rated countries have been assigned negative outlooks, including Britain in 2009. Three were subsequently downgraded, and two were returned to a stable outlook.
S&P restored its outlook on British bonds to stable after it determined that new austerity measures to cut spending and raise revenue would reduce the government's general deficit to 3% of GDP by 2014 from 11.2% in 2009. If the U.S. reaches a British-style resolution, Mr. Chambers said, S&P will restore the U.S. outlook to stable.
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President Obama last week was sharply critical of the House GOP budget blueprint.
The White House last week proposed reducing the deficit at a moderate pace through a combination of tax increases, changes to Medicare, and cuts in military and other spending. Republicans have called for quicker action, with bigger cuts in spending and overhauls of Medicare and Medicaid.
S&P said the difference was stark. "We see the path to agreement as challenging because the gap between the parties remains wide," the report said.
Bill Gross, a founder of Pacific Investment Management Co., manager of the world's biggest bond fund, dumped government-related holdings in February and began shorting them in March.
Today's news "validates our position," Mr. Gross said. "S&P and Moody's are far behind the eight ball and have been for years. But S&P is now more alert to the seriousness of America's fiscal issues, and I think this is one warning shot at least to investors that should be loud and clear in Washington…. I'm not sure that they hear."
Some analysts believe that Treasury yields could begin widening in June if no action is taken, pushing up interest rates, making it harder for companies to borrow and less likely to hire.
—Mary Pilon and Carol E. Lee contributed to this article.
U.S. Warned on Debt Load S&P Signals Top Credit Rating Is in Danger, Stoking Politica
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